The Hindu Business Line : Economy: Can the dream run be sustained?

There have been quite a few favourable developments over the past three years with the average GDP growth rate surging to over 8 per cent. The major growth drivers have been the higher savings and investment ratio, robust growth in exports and imports, resurgence of the manufacturing sector and a smart pick-up in FDI inflows. Will this dream run sustain, asks S. D. NAIK.

With robust growth in 2005-06, the economy has had a dream run for three years in a row with GDP in real terms growing at 8.5 per cent in 2003-04, 7.5 per cent in 2004-05 and 8.4 per cent in 2005-06. But the big question is: Will this dream run sustain in the coming years?

According to the revised figures of economic growth released by the Government, the GDP growth in 2005-06 was 8.4 per cent, surpassing the 8.1 per cent growth estimated by the Central Statistical Organisation (CSO) earlier. As per the revised estimate, the economy grew 9.3 per cent in the fourth quarter of the year against 8.6 per cent in the corresponding previous quarter. The higher growth was propelled largely by the farm sector which grew 3.9 per cent during the year, surpassing the earlier estimate of 2.3 per cent by a wide margin.

The manufacturing sector also performed better by registering a growth of 9 per cent in 2005-06 compared to 8.1 per cent in the previous fiscal. In April 2006, the manufacturing sector grew 10.4 per cent against 9.2 per cent in the corresponding previous month. The overall GDP growth could have been better but for the disappointing performance of mining and quarrying; the growth of the sector declined sharply to 0.9 per cent from 5.8 per cent in 2004-05. The growth of the electricity sector also remained subdued at 5.3 per cent (4.3 per cent in 2004-05).

Taking a medium-term view, there have been quite a few favourable developments over the past three years when the average GDP growth rate surged to over 8 per cent. The major growth drivers in recent years have been the higher savings and investment ratio, the robust growth in exports and imports, the resurgence of the manufacturing sector and the smart pick up in foreign direct investment inflows.

SAVINGS AND INVESTMENT

Gross domestic savings as a percentage of GDP rose steadily from 23.6 in 2001-02 to 26.5 in 2002-03, 28.9 in 2003-04, and to 29.1 in 2004-05. The gross domestic investments increased from 23 per cent of GDP in 2001-02 to 25.3 per cent in 2002-03, 27.2 per cent in 2003-04 and further to 30.1 per cent in 2004-05, going by the new series released by the CSO with 1999-2000 as base. More important, there was a brief cessation of export of domestic savings and resumption of the supplemental role of foreign savings in the economy.

The surge in investments is also reflected in the significant rise in the domestic production and the import of capital goods over the past two-three years and healthy growth of bank credit to the productive sectors . FDI inflow are estimated to have touched $8 billion in 2005-06, up from $5 billion in 2004-05.

EXPORT GROWTH

Merchandise export in dollar terms has grown at a robust pace of over 20 per cent per annum for four years in a row, from 2002-03 to 2005-06 and has surpassed the targets. The export growth in 2005-06 was 25 per cent on top of the 26 per cent growth achieved the preceding year and the country's export earnings crossed $101 billion. The Commerce and Industry Minister, Mr Kamal Nath expects exports to exceed the target of $150 billion by 2008-09.

In the case of services exports, the performance has been much more impressive. The country's share in world services exports has gone up to 2.8 per cent in 2005 from 1.9 per cent in 2004 even as the share of merchandise exports inched up to just 0.9 per cent in 2005. The share of services in India's total trade rose from 23.5 per cent in 2003-04 to 29.1 per cent in 2004-05 and further to 35 per cent in 2005-06.

ROLE OF AGRICULTURE

Notwithstanding the new growth drivers, it is the farm sector which holds the key to sustaining the growth rate of the economy. The healthy jump of 3.9 per cent registered by the sector in 2005-06 is from the lower base of 0.7 per cent the preceding year when the GDP growth had dipped to 7.5 per cent. In 2003-04, the economy grew 8.5 per cent when agricultural growth was 9.6 per cent. In 2003-03, the GDP decelerated sharply to 3.8 per cent when the farm sector had registered a negative growth of 7 per cent.

Economists and experts have repeatedly pointed out that the farm sector should continue to grow at around 4 per cent per annum if the economy is to sustain a growth rate of over 8 per cent over a longer period. Unfortunately, however, the growth rate of this vital sector has continued to decelerate from 3.2 per cent in 1980-96 to 2.1 per cent in 1997-2002 and further to just around 1.5 per cent over the next three years. This is because of the big decline in public investment in the sector.

The reasons for the sharp deceleration in the farm sector growth rate are obvious. There has been a steady decline in the capital formation in agriculture from 2.2 per cent of GDP in the late 1990s to 1.7 per cent in 2004-05. According to the Finance Minister, Mr P. Chidambaram, capital formation in agriculture was stagnant in 2005-06. This trend needs to be reversed at the earliest by stepping up public investment in the sector, particularly in irrigation.

Apart from agriculture, infrastructure needs special attention, the power sector, in particular. Power shortage could become a major stumbling block to higher economic growth. The relentless rise in crude oil prices in the international markets, the upward pressure on interest rates and the failure to pursue the path of economic reforms at a vigorous pace could spoil the party. Hence, there is no room for complacency.